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David Hume on Public Credit Maria Pia Paganelli Trinity University, Mpaganel@Trinity.Edu Trinity University Digital Commons @ Trinity Economics Faculty Research Economics Department 2012 David Hume on Public Credit Maria Pia Paganelli Trinity University, [email protected] Follow this and additional works at: https://digitalcommons.trinity.edu/econ_faculty Part of the Economics Commons Repository Citation Paganelli, M.P. (2012). David Hume on public credit. History of Economic Ideas, 20(1), 31-43. This Article is brought to you for free and open access by the Economics Department at Digital Commons @ Trinity. It has been accepted for inclusion in Economics Faculty Research by an authorized administrator of Digital Commons @ Trinity. For more information, please contact [email protected]. electronic issnelectronic 17 issn X · OF ECONOMICS IDEAS HISTORY 1122-8792 HISTORY OF 24-2169 ECONOMIC IDEAS X/2012/1 HEI offprint XX/2012/1 Fabrizio Serra editore Pisa · Roma Electronic copy available at: http://ssrn.com/abstract=2142520 HISTORY OF ECONOMIC IDEAS History of Economic Ideas Online www.historyofeconomicideas.com Editors: Riccardo Faucci (University of Pisa) Roberto Marchionatti (University of Turin) Book Review Editor: Nicola Giocoli (University of Pisa) Editorial Board: Richard Arena (University of Nice), Duccio Cavalieri (University of Florence), Marco Dardi(University of Florence), Peter D. Groenewegen (University of Sydney), Hansjörg Klausinger (University of Vienna), Christian Seidl (University of Kiel) Advisory Board: M. M. Augello (University of Pisa),G. Becattini (University of Florence), A. A. Brewer (University of Bristol), B. J. Caldwell (Duke University), A. L. Cot (University of Paris i), R. W. Dimand (Brock University), S. Fiori (University of Turin), G. C. Harcourt (University of Cambridge, uk), A. Karayiannis† (University of Piraeus), B. Ingrao (University of Rome «La Sapienza»), J. E. King (La Trobe University), S. Perri (University of Macerata), C. Perrotta (University of Lecce), P. L. Porta (University of Milan · Bicocca), T. Raffaelli (Univer si ty of Pisa), W. J. Samuels† (Michigan State University), A. S. Skinner† (University of Glasgow), J. K. Whitaker (University of Virginia) Editorial Assistant: Carlo Cristiano (University of Pisa) Address: The Editor, History of Economic Ideas, Dipartimento di Scienze Economiche, Facoltà di Giurisprudenza, Via Curtatone e Montanara 15, i 56126 Pisa, tel. +39 050 2212845, fax +39 050 2212853, [email protected] History of Economic Ideas is an international peer-reviewed journal and it is indexed and abstracted in Scopus (Elsevier) and in Current Contents/Arts & Humanities, Art & Humanities Citation Index, Social Science Citation Index and Journal Citation Report/Social Science Edition (isi · Thomson Reuters). The eContent is Archived with Clockss and Portico. Electronic copy available at: http://ssrn.com/abstract=2142520 «History of Economic Ideas», xx/2012/1 DAVID HUME ON PUBLIC CREDIT Maria Pia Paganelli* Trinity University, San Antonio (tx) In his essay Of Public Credit, David Hume argues against the institutionalization of public credit. Contrary to what is commonly believed, I claim Hume’s analysis of public credit is sound and it is an example of his worst-case thinking. Through textual and contextual analysis, I show for Hume public credit brings catastrophic results because men are knaves, systematically biased, and unlucky. Public credit is an appropriate institution to stimulate the economy only if men are perfect and perfectly predictable. But they are not. For Hume, considering the worst-case rather than the best-case helps prevent potential disasters. Public credit should therefore be avoided. 1. David Hume on Public Credit avid Hume publishes a critical essay on public credit in 1752. His as- Dsault against debt is dramatic: «[E]ither the nation must destroy public credit, or public credit will destroy the nation» (Hume 1752, 360- 361). The essay is not well received either by his contemporaries or by ours. «Hume’s conviction that national debt could reach the point of subverting the whole fabric of society may be thought of as a blockage in his economic thinking, one that not even [Adam] Smith could quite overcome or [Isaac] de Pinto persuade him to abandon» (Pocock 1985, 139). Could Hume’s convictions about public credit be something oth- er than a «blockage in his economic thinking»? Is there a way to make economic sense of what Hume writes? There are many convincing socio-political explanations for Hume’s aversion to public debt, mostly based on war-related arguments, but serious economic interpretations are lacking (see Hont 1993, Kram- nick 1968, Laursen and Coolidge 1994, Pocock 1975, Pocock 1985, Vick- ers 1959). With this paper I propose that Hume’s argument against public credit is sound on economic grounds if we think of it as an ap- plication of worst-case thinking. Hume is a well-known worst-case theorist (see Crapmpton and Farrant 2008, Farrant and Paganelli 2005, Levy 2002). Applying worst-case theorizing method to Hume’s model of public credit may help us see why Hume remains perched on his position despite the swiping criticisms of some of his contemporaries, * Address for correspondence: [email protected] 32 Maria Pia Paganelli such as Rober Wallace (1969 [1758]) and Isaac de Pinto (1969 [1764]). The criticisms Hume receives are indeed on his results, not on his method. This may also imply that Hume’s analysis of public credit shows us that the «blockage in economic thinking» may come from our being more accustomed to thinking in terms of best-case rather than in terms of worst-case. Hume, in his essay on public credit may, therefore, remind us of a different method of analysis – worst-case thinking – which may be useful to us today. The hypothesis I propose in this paper is that Hume’s argument against public credit is dependent on certain starting assumptions. As- suming the best of human nature and of the socio-political environ- ment, public credit can be seen as a way to stimulate the economy and should be endorsed. But by relaxing these best-case assumptions and in- troducing systematic biases and knavery, or even a simple wave of bad luck, public credit can bring catastrophic results and should be avoided instead. Hume’s essay on public credit can be interpreted as teaching that considering the worst-case rather than the best-case may help pre- vent potential disasters. The paper develops as follows. In the next section, I present the two different ideas of public debt Hume uses. Public debt is an ancient tool of financing public expenditure. Yet, in antiquity the dominant institu- tion for paying for public expenditure is the treasury room. Debt is an extension of the institution of the treasury room. Debt is to be issued only during emergencies, when the treasury is empty. The institution- alization of public debt comes with the idea that debt is an effective pol- icy tool to stimulate the economy. This idea is relatively recent and it starts to take hold in Hume’s time. The following section presents the intellectual context in which Hume works. The tension between an- cient and new ways of thinking is present in many areas of inquiry, in- cluding, but not limited to, the idea of time and the idea of society. Avoiding disaster, that is worst-case thinking, seems to be more typical of ancient times. Aiming at the best possible results, that is best-case thinking, seems to be more typical of a new and modern approach. If seen in this light, Hume’s debate on public credit may become more salient. The next session presents Hume’s cost-benefit analysis of the in- stitutionalization of public credit under the assumption that all that can go right does so, the argument common in his day and against which he is making his case. I then examine Hume’s analysis of some of the pos- sible effects of public credit being institutionalized, if all that may go wrong does go wrong. The final section of the paper presents some lim- its of Hume’s analysis, as highlighted by some of his contemporaries, whose criticisms may hold today as well. Concluding remarks end the paper. David Hume on public credit 33 2. What kind of debt? Hume opens his essay on public credit by recognizing that a govern- ment has a choice between two ways of financing public expenditure: accumulating riches in a treasury room,1 as the ancients did, or the more modern method, issuing public debt.2 A treasury room is a re- serve of money. It preserves societies from possible devastations, such as wars or natural calamities, by providing funds and, therefore, stabil- ity when most needed. In Hume’s words: «It appears to have been the common practice of antiquity, to make provision, during peace, for the necessities of war, and to hoard up treasures before-hand, as the instru- ments either of conquest or defence; without trusting to extraordinary impositions, much less to borrowing in times of disorder and confu- sion» (349). Public debt, in its turn, is issued for two reasons: either be- cause of serious «necessity», as was done in antiquity, or «for promoting commerce and riches», as is done today (352). «Necessity» debt is issued when the treasure is exhausted but funding is still needed to complete something that turns out to be more expensive than originally expect- ed – say, to bring a war to an end. In this sense, «necessity» debt does not significantly differ from the treasury room. «Necessity» debt is an ex- tension of the treasury room. It extends the treasury room when the treasury room is exhausted. Hume therefore juxtaposes the treasury room not with «necessity» debt, but with the other form of public cred- it, the one issued «for promoting commerce and riches». The literature often overlooks this difference in the justification of public debt, focusing instead on Hume’s condemnation of public debt as a way to finance wars (see, for example, Hont 1993, Pocock 1985, Rotwein 1970).
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